Global Value Fund (HWGAX)

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The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Investment return and principal value of the fund will fluctuate, and shares may be worth more or less than their original cost when redeemed. Click quarter-end or month-end to obtain the most recent fund performance.

Manager Commentary
Period ended March 31, 2018

 

MARKET COMMENTARY

In the first quarter of 2018, the Russell Developed Index declined -1.1% in US Dollar terms.  The US Dollar weakened between 2% and 3% relative to other major currencies, so in local currency terms global index declined between -3% and -4% in the quarter.  Growth stocks continued to outperform value stocks; growth’s remarkable stretch of recent outperformance is rivaled only by the internet bubble of the late 1990s.  While the broad market’s valuation today is much less extreme today, a number of popular stocks trade at valuation multiples straight out of the late 1990s.  In our view, to justify the current valuations of today’s most loved growth stocks, many things will have to go perfectly right for a very long period.  In our experience, such unbridled optimism is often met with disappointment. We believe that this poses a risk for passive investors because they are, either consciously or naively, allocating capital to excessively valued securities.  Very few people would buy a new house, car, or even a meal without regard to price, yet this discipline is sometimes forgotten when buying stocks. 

Fortunately for disciplined investors that care about price and value, we believe some segments still offer the potential for attractive returns given the risks at hand. Financials continue to represent the largest sector weight in the portfolio in absolute terms and relative to the benchmark.  Despite strong recent price performance, banks continued to trade at valuations well below their historical averages.  We think that competitively advantaged banks like the ones we own should be able to earn above cost-of-capital returns.  Accordingly, we view 11x normal earnings and a small premium to book value as compelling valuations, particularly considering that the excess capital on their balance sheets reduce the risk profiles dramatically. 

In recent years we have been overweight industrials in our portfolio.  In our opinion, we have found a number of attractively valued, well-managed companies with strong balance sheets and good prospects for growth.  These are cyclical businesses (albeit exposed to different end-markets and different cycles), but we are more than happy to “look through” the cycle and buy businesses at attractive prices relative to normalized earnings when the opportunity is presented.

We have increased our energy weight as the sector has significantly underperformed the market in recent years.  We believe oil prices have been unsustainably low and that a rise in commodity prices will be necessary to bring global supply in line with global demand growth.  Accordingly, we have positions in upstream energy companies that are positively exposed to changes in crude prices, as well as oilfield service providers who stand to benefit from increased activity levels and tightening supply-demand dynamics in their own sub-markets.  We have a strong preference for companies with good balance sheets so that we are not exposed to shareholder dilution in the event the reversion in oil prices takes longer than we anticipate. 

We remain underweight consumer staples because valuations appear a bit rich, but less so today than in the past.  For the first time in several years, we have found new opportunities for investment in the sector.  These new positions possess great brands and growing profits, driven both by margin expansion and top-line growth, particularly in the emerging markets.

Over long periods, global value has outperformed global growth, and we have no reason to believe we have entered a paradigm shift that would change this going forward.  Style shifts can occur quickly and powerfully, and we believe we are well positioned for such a reversion.  We continue to be encouraged by the portfolio’s valuation discount relative to the benchmark. The portfolio trades at 6.9x normal earnings and 1.2x book value, a notable discount to the Russell Developed Index (15.9x and 2.2x, respectively).  We remain committed to maintaining our unwavering dedication to the principals of long-term, fundamental value investing—while fads can drive short term performance fundamentals prevail in the long run.   

ATTRIBUTION: 1Q 2018

The Hotchkis & Wiley Global Value Fund (Class I) outperformed the Russell Developed Index in the first quarter of 2018.  The portfolio’s value approach was a considerable headwind as growth stocks outpaced value stocks globally.  This was a challenge to performance that was overcome by positive stock selection in a variety of sectors.  Positive stock selection in consumer staples, technology, and energy helped relative performance.  Stock selection in consumer discretionary and real estate, along with the overweight exposure to energy hurt.  The largest individual positive contributors to relative performance were Hewlett Packard Enterprise, Royal Mail, Whiting Petroleum, Popular, and Danieli; the largest detractors were WestJet Airlines, Masonite International, AIG, Wells Fargo, and Vodafone.   

LARGEST NEW PURCHASES: 1Q 2018

Credito Valtellinese is the 10th largest bank in Italy with ~$25B in assets. Like many Italian banks, the Company was struggling with a high level of non-performing loans. We recently participated in a recapitalization of the bank that will enable it to fully repair its balance sheet by selling non-performing loans.  Despite these improvements to the balance sheet and outlook, Credito Valtellinese continues to trade at a low multiple of book value and normalized earnings, and in-line with local peers that have not yet addressed the problems in their own loan books.

Unilever is one of the leading suppliers of consumer goods in the food, home care, and personal care product categories.  Leveraging its brand strength, Unilever has attained #1 or #2 market share across 85% of its business. We believe it is attractively valued and management has implemented plans to expand margins in the coming years while returning capital to shareholders. 

Heineken is the #2 brewer by volume and revenue in the world. It has dominant market share, including #1 or #2 position in 90% of its markets. In our opinion, the company enjoys an attractive embedded growth profile with 60% of profits coming from emerging markets and strong positions in the fast growing and profitable markets of Mexico, Vietnam and Nigeria. The brewing industry is capital intensive with high barriers to entry, as it is not economic to ship beer across long distances and brands take a long time to build. Despite these advantages, Heineken trades at a modest valuation relative to normal earnings.

Mutual fund investing involves risk. Principal loss is possible. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for emerging markets. The Fund may invest in American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”) which may be subject to some of the same risks as direct investment in foreign companies.

Fund holdings and/or sector allocations are subject to change and are not buy/sell recommendations. Current and future portfolio holdings are subject to risk. Certain information presented based on proprietary or third-party estimates are subject to change and cannot be guaranteed. Portfolio managers’ opinions and data included in this commentary are as of 3/31/18 and are subject to change without notice.  Any forecasts made cannot be guaranteed.  Information obtained from independent sources is considered reliable, but H&W cannot guarantee its accuracy or completeness. Specific securities identified are the largest contributors (or detractors) on a relative basis to the Russell Developed Index. Securities’ absolute performance may reflect different results. The “Largest New Purchases” section includes the three largest new security positions during the year based on the security’s year-end weight adjusted for its relative return contribution; does not include any security received as a result of a corporate action; if fewer than three new security positions at year-end, all new security positions are included. The Fund may not continue to hold the securities mentioned and the Advisor has no obligation to disclose purchases or sales of these securities. Attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect the payment of transaction costs, fees and expenses of the Fund. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss in a declining market.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform other asset types during a given period. Equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. 

 

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